Reserves and Business plan

[Chase Tompkins]

Hello, I currently have 3 questions to ask. 

When starting out as a new real estate investor do you absolutely need reserves? I was talking with a local investor and he was explaining how I need about 20k in reserves of course that would take me forever. I understand it helps just in case something goes wrong. I do not want to wait until I have 20k in reserves which could take years in your opinion is this an absolute necessitate? 

The second question when it comes to getting hard money should I be sending these people deals that I know make a decent profit to show that I am out here looking at deals with positive cash flow?

The 3rd question is are the homes on realtor or Zillow not the way to go when finding deals should I be really out to look for worn-down homes throughout the neighborhood?  I heard I few opinions explaining you can't find a good deal through those websites I just wanted more opinions. 

Thank You for your input and opinions. 

[Leo R.]

Quote from @Chase Tompkins:

Hello, I currently have 3 questions to ask. 

When starting out as a new real estate investor do you absolutely need reserves? I was talking with a local investor and he was explaining how I need about 20k in reserves of course that would take me forever. I understand it helps just in case something goes wrong. I do not want to wait until I have 20k in reserves which could take years in your opinion is this an absolute necessitate? 

This depends on factors like the type of property you're buying and its risk profile, your income, your ability (or inability) to do your own repairs, the amount of the mortgage payment, the exposure to vacancy, etc., etc.  Different properties will have completely different risk profiles--the reserves needed for a 1500 sq ft A grade house are completely different than the reserves needed for a 5000 sq ft C grade house, for example. A house in rural Kansas will have a completely different exposure to vacancy than a house in the A grade neighborhoods of Miami.  A house with a brand new roof requires less in reserves than a house where the roof only has 5 years left. etc., etc.  It's not a matter of having reserves "just in case something goes wrong", it's a matter of "WHEN something goes wrong"--unanticipated expenses are an unavoidable part of REI.  So, how much you need in reserves depends on how much the property costs to operate--thus, it's essential to understand what a property will cost you to operate before you buy. This is why proper due diligence is the foundation of successful REI.

The second question when it comes to getting hard money should I be sending these people deals that I know make a decent profit to show that I am out here looking at deals with positive cash flow?

If you're not yet sure about what a property costs to operate and how much you need in reserve, I'd suggest holding off on looking for hard money until you're more experienced with the fundamentals of REI.  If you're a beginner, I'd suggest starting with a more beginner-friendly strategy (like house hacking using a conventional owner-occupant 30 yr mortgage, which has the best terms). 

The 3rd question is are the homes on realtor or Zillow not the way to go when finding deals should I be really out to look for worn-down homes throughout the neighborhood?  I heard I few opinions explaining you can't find a good deal through those websites I just wanted more opinions. 

It depends on what strategy you're using, what skillset you have, and what your goals are. If you have the time and motivation to find off market deals, go for it (but that's an operation that requires a certain commitment and skillset, and it's a relatively steep learning curve for a beginner). All other things being equal, the easier route for a beginner is to buy a property on the MLS. It is possible to find good investments on MLS-fed sites like Zillow. In fact, the bulk of my portfolio was purchased off the MLS during one of the worst buyer's markets in US history, yet my portfolio performs very well.  It's all about understanding how to find a property that has hidden value or a value add opportunity that other buyer's don't see, and then taking advantage of that (which is an entire topic in and of itself)

Thank You for your input and opinions. 

Good luck out there!